04 August 2022 |

Underdog Sports: An Overvalued Series B?

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Is Underdog Overpriced?

Introduction

One of the most competitive & difficult industries to succeed in currently is sports gambling. 

DraftKings, FanDuel, Caesars, MGM, Penn National (Barstool), and so many others are in a spending war to acquire customers. Here are some stats: 

  • In 2020, DraftKings average CAC reported was $373 – a number I would assume is significantly higher now with inflation, changes in Apple privacy laws, and consumers being more skeptical of the macro environment
  • Some analysts project that CAC could be rising to $1K-$2K in competitive markets 
  • TV Ad Spend in 2021 was ~$720M vs. ~$300M in 2020 – a number that I would expect to continue to rise greatly in 2022

You have to look no further than DraftKings Income Statement just to see how expensive the “Sports Gambling Wars” are: 

As you can see, the revenue growth has been explosive, hovering around 100% annually, however, the losses have been breathtaking as well. 

Without going too in depth into DraftKings, analysts expect 2022 Revenue & EPS to be $2,805M & -$3.30 respectively (CMLViz). With 411M shares outstanding at the end of Q1 (WSJ), that EPS would translate to another net loss of ($1,350M). 

This is something to watch closely as going into 2022, DraftKings only had $2.1B in cash & $1.3B in debt (convertible). The possible liquidity issues for DraftKings is something we will circle back to in a little bit. 

Private Markets

Last week, there was some big news in the Daily Fantasy Sports (DFS) space as Underdog Fantasy announced a $35M Series B @ a $485M valuation led by BlackRock & Acies Investment. 

To the best of my knowledge, Underdog has never released any figures surrounding the number of users, revenue, profitability, or any handle related figures. 

This is a stark contrast to PrizePicks, Underdog’s #1 competitor, who has disclosed significant figures regarding the company’s performance including: 

  • Adding 300K new members in 2021 alone 
  • 1000% Gaming Handle Increase YoY
  • 40+ markets offered 
  • Operating “at near break even levels.”

On top of the figures mentioned above, PrizePicks simple and slick interface along with their customer affinity represented by their 62K discord is why they have been my pick in the DFS space since January and continue to be. 
Additionally, it sounds as if Underdog will be looking to move closer & closer to becoming a classic sportsbook as the company recently acquired Goat Gaming. 

The company also  shared in their official press release that they plan to “build innovative licensed sports betting products”, while PrizePicks has not – a move that I love strategically. 

Exit Strategy

When I started my journey at Just Raised covering the VC landscape, one of the best pieces of advice I received was to look at the VCs backing certain ventures and their experience in getting deals done. 

There are many times when the company that is acquired does not have the best product or technology, but rather the VCs have the best connections and ability to make deals. 

When you look at Underdog, with BlackRock behind them, they have one of the greatest Private Equity/alternative investment deal makers in the world. This matters when you think of Underdog’s long term prospects and ability to exit.

Additionally, going a step further, Jeremy Levine, the founder & chairman of Underdog, has significant experience starting and selling companies in the DFS/sports gambling arena. 

In 2009, when Levine was still in college, he started StarStreet, a platform that allowed individuals to invest in a “stock market for athletes” with real money. StarStreet ultimately pivoted to DFS and sold to DraftKings in 2014. 

Levine then went on to build DRAFT, another DFS platform focused on the best part of fantasy (drafts!), to Paddy Power Betfair for $48M in 2014. 

Even though I am skeptical about Underdog’s valuation, there is no way around the fact that Levine & Blackrock know what they are doing and how to get deals done. 

As an investor, I would not be looking to invest in a deal that relies on an acquisition or additional further venture funding to fuel growth or achieve capital return in this economic environment. The ability to churn profit is the ultimate life jacket and that seems much more of a reality for PrizePicks than Underdog. 

Wrapping It Up

Circling back to DraftKings, a once serial acquirer in the space, does not appear to be in the position to make a significant acquisition & likely won’t be. 

As mentioned earlier, the company is expected to lose $1.3B this year with only $2.1B in cash & $1.3B in debt. In 2023, analysts also expect around a $820M loss. These two years of losses are greater than the cash on hand. 

I am not concerned about bankruptcy with $DKNG as they will likely find a way to take out more debt, or issue more stock but the numbers do not seem to add up. 

What this would likely mean is that smaller players like an Underdog who might be banking on an acquisition from DraftKings might not have much to bank on. 

I continue to be intrigued by Penn National Gaming’s trajectory in this space due to their strong balance sheet and ability to leverage Barstool to have industry leading CAC margins. I can’t wait to break down $PENN, but stay tuned for Monday, as we break down our other portfolio pick in the sports gambling arena – Sportradar!

-Alan

The Crossover Portfolio

  • We made a second set of transactions that simply doubled our existing positions as we continue to build stakes in the company’s above
  • After market close today, the cornerstone of the portfolio $FIGS reports earnings. Honestly, I am hoping the earnings are rough so we can continue to build a position at a deep discount to what the stock can be worth years from now. We shall see!
  • And yes, for those wondering, there will be private investments joining the portfolio soon. We Just closed the first deal earlier this week so stay tuned 🙂

Golden Nuggets

  • Y Combinator is cutting back the # of companies in the program by 40%
  • This was crazy. The Red Sox traded Catcher Christain Vasquez to the Astros just one hour before the two teams played each other. Vasquez already knew the Red Sox game plan for the evening!
  • As someone that loves Fantasy Football, this tweet killed me
  • RIP to the GOAT Vin Scully. Here is the clip of him signing off in 2016. 

Meme of the Day

Thanks for the read! Let me know what you thought by replying back to this email. See you in your inbox every Monday and Thursday.

— Alan  

Disclaimer: This analysis is for educational and entertainment purposes solely and is not professional investment advice. The author of this piece and/or members of Workweek media could be invested in companies discussed.